Interest Rate Decisions

If you are thinking of buying a home this spring, great news.Over the last two weeks, many lenders have dropped their rates multiple times.

One family I have been working with made an offer on a home at the beginning of March and closed on Friday. When we submitted their application for approval, the best rate (for their situation) I could find was 3.49 per cent. By the time their mortgage closed, their rate was down to 3.19 per cent. While this may not sound like a big deal, on a mortgage of $650,000 the interest savings for this family over the five-year term will be approximately $9,200.

Rate is only one piece of the mortgage puzzle, and I tell my clients upfront that I don’t choose lenders based on rate alone. Client experience is a very important factor in my decision to place a client with specific lenders.

In February, a young lady I’m working with wrote an offer on a home with a closing date that is a few months away. The house was a rental and the tenants had to be given notice.
The house needs some updates so we have a Purchase Plus Improvements mortgage lined up so she can renovate the bathrooms and replace the roof and furnace. After we had her approval in place, she called and asked about an interest rate she had seen online.

The rate was slightly lower than the approval I had in place for her. I did some investigation (called the company advertising the rate) and learned a bit more about their offer. The mortgage was a no-frills product and did not offer a Purchase Plus Improvements option, so was definitely not the right fit for her.

I generally try to steer clients away from the no-frills mortgages as initial cost savings may mean major stress down the road. As an example, some lenders offer both a regular mortgage and a low interest option. The low interest option tends to be .05 per cent lower. The differences between lenders’ regular pricing and low interest option can include higher prepayment penalties or restrictive exit terms.

By exit terms, I mean that some lenders will not allow you to break your mortgage before the term is up unless there is a bona fide sale of the property.

When buying a home, most people feel that they will be there for the five-year term and have no plans to move. Life happens. You might be offered an amazing job in another community. You may come in to money unexpectedly. More unfortunate reasons like marital separation or job loss might put you in the position of having to sell your home. You may run into financial difficulties and need to refinance to pull equity from your home.

Statistics show that almost two-thirds of Canadians break their mortgage term before the five years are up.

In a no-frills mortgage, with the unexpected situations that arise you could find yourself in the position of having to pay a significantly higher penalty, unable to port your mortgage to your new home, or be unable to refinance.

There are other important considerations when I choose a lender for my clients. Each mortgage lender has slight differences in their policies and calculations. There are only a few companies left that include Child Tax Credit income in their calculations. For some families this income means the difference between qualifying for their mortgage or not. Some lenders will use 100 per cent of suite income when evaluating a mortgage application, while others will only use 80 or 50 per cent. This subtle difference can also mean the difference between clients affording a home or not.

Finally, some lenders will not drop their interest rate (or will only do it once) after a mortgage has been approved.

Everything else being equal, I have a few lenders I love to work with as they have exceptional turnaround time and do their best to make applications work.

In my last column, I talked about how the most stressful time of the home-buying process is the wait between submitting your application and finding out you are approved and condition-free.
This last few weeks of crazy rate drops have driven home the importance of choosing a lender that is truly client-focussed.

My young lady doing the Purchase Plus Improvements mortgage has also had her rate reduced by .30 per cent. In her case, this will mean a savings of approximately $6,000 over her five-year term.

More to Mortgages than just Interest Rates

Working with an experienced mortgage professional can save you a great deal of stress down the road. Someone who knows the intricacies of different mortgage products, and has access to different types of lenders, can mean the difference between successfully qualifying for a mortgage or not …. and can help avoid needless expense down the road.